Down rounds often signal risks of a struggling business to future investors. But contrary to expectations, venture-backed companies that have taken on a down round are likely to continue on the path to growth—including raising new rounds and restructuring following a buyout.

Only 13% of the US companies that raised a down round from 2008 to 2014 were unable to raise a new round or exit immediately after, according to a recent  PitchBook analyst note.
   
Companies that raise a down round are more likely to be acquired by a private equity firm. Nearly 1 in 5 of the companies analyzed took the buyout path. Within the broader venture ecosystem, 11.5% of company exits since 2016 have occurred through a buyout.

Kyle Stanford, a senior analyst at PitchBook, said the difference is significant because it highlights the change in expectations needed for companies that have raised a down round.

"The unicorn IPO is probably not on the table for most companies after a down round, but buyout firms come in and buy companies that are strong underlying businesses that just need to be restructured," said Stanford.

Most late-stage companies that go through a down round have likely raised no small amount of capital already and tested their ideas in the market, helping PE firms perform due diligence on true financial performance, product fit and addressable market, rather than on an idea of what a technology or market may be.

"Entrepreneurs come in believing they will build a billion-dollar company. The down round data shows that likely isn't going to happen anymore, and the expectation of the size of their company needs to be adjusted," said Stanford.

Related read: PitchBook Analyst Note: Down Rounds, Impacts, and Exit Opportunities

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This article originally appeared on PitchBook News